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Economic Insights

Ongoing strength in job creation could push the U.S. unemployment rate below 4% by year-end. 

The ongoing strength in the U.S. labor market was evident in the U.S. employment report for October, released by the U.S. Bureau of Labor Statistics on November 3. Here are some additional insights gleaned from the report:

  • The net payroll employment gain for the month of 351,000 (which reflects aggregate upward revision of 90,000 to August and September) was in line with estimates that calculated a full recovery of hurricane-related job losses and ongoing monthly “trend” gains of around 160,000–170,000. That is strong enough, easily, to keep forcing down the unemployment rate from the recorded October level of 4.1%. We think it could move below 4% before the end of 2017.
  • The drop in the labor force, to 160.4 million in October from 161.1 million in the previous month, could have been a reflection of the new immigration regime and an improvement in the economy, along with a rise in asset prices; this trend also seems to be making older workers feel more secure about retiring. Such influences are reflected in a declining labor force-participation rate and a more slowly growing labor force. A shortage of workers should lead companies to look for ways to increase working hours, raise productivity, and hold onto existing employees if they want to continue growing.
  • The October drop in the underemployment rate (the category U-6, according to the U.S. Department of Labor), to 7.1%, brought the rate back down to its lowest level since the expansion of 2002–07. The lowest reading at the end of the previous expansion (the longest in U.S. history) was 6.7%. However you look at it, though, the percentage of people who want a job, but aren’t currently employed, is extremely low. This means that businesses will have an increasingly harder time to keep existing workers from leaving for better offers and hiring new ones to replace those who leave.
  • The 0.0% average hourly earnings increase in October, and its drop to 2.4% year over year, was a reflection of shifts among employment sectors rather than easing pressure on wages. For example, very low-paid employment in leisure and hospitality industries fell by 102,000 in September, and rose 106,000 in October. The irregular pattern was a reflection of the impact of the recent U.S. hurricanes. But the shift in the composition of jobs would have boosted average hourly earnings in September by losing low-wage employment and depressed the average in October by getting back the same jobs. The same pattern was likely reflected within and across other industries for low-wage workers, who generally are easier to fire and hire than high-wage employees.
  • As we know from more robust labor compensation data reported in other surveys, labor costs are rising very slowly. They are accelerating less rapidly than would be predicted based on measures of labor market slack and too slowly to generate consistent upward pressure on prices. Thus, the inflation forecast—very gradual increases that will only hit the U.S. Federal Reserve’s (Fed) target of in 2019, according to the Fed—should be unchanged.
 
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